00:00 Two weeks ago Meta unveiled a new social media platform called Threads. The platform hit 100
00:05 million users in less than 5 days, surpassing chatGPT as the fastest growing product of all time.
00:11 The question is, will it have a material impact on Meta stock? At the latest share price,
00:16 Meta has a valuation of $800 billion. It's got $11.6 billion of cash on the balance sheet
00:22 and $10 billion of long term debt, so the enterprise value is $797 billion. Revenue
00:28 based on the last 12 months is $117 billion with net income of $21.4 billion and free cash flow of
00:35 $17.6 billion. That means Meta stock is valued at 6.8 times revenue, 37 times earnings and 45 times
00:42 free cash flow. That's an expensive price to pay, but it's easy to see why Meta is valued at a
00:48 premium. It's family of apps are used by more than 3 billion people around the world. It's got
00:54 excellent gross margins of 80% and a good chunk of revenue flows straight to the bottom line.
00:59 In other words, Meta is an extremely profitable business. However, after a 160% rally year to
01:04 date, some caution may be needed. Trailing 12 month revenue is still flat and net income is
01:10 still down 45% from its peak after the company started to invest heavily in the Metaverse and AI.
01:16 As for Threads, the reason it's grown so quickly is because users have simply been ported over
01:21 from Instagram. In other words, this is not organic growth. CNBC reported yesterday that
01:27 after some initial excitement, time spent on the app is already down 50%. Meanwhile,
01:33 Instagram feels dated. A high proportion of people say that they never use Facebook anymore
01:38 and its demonstration of the Metaverse left a lot to be desired. As a result, Meta will continue to
01:44 invest in new products and that's going to keep its net income margin lower than in the past.
01:49 All that said, in the world of online advertising, businesses don't have too many options. TikTok and
01:55 Twitter have potential but Google Ads and Meta are still the giants with the ability to get in front
02:00 of billions of users. Let's assume Meta can grow revenue at 10% a year for the next 10 years and
02:06 get its net income margin eventually back to 30%. In that scenario, the company would be generating
02:12 $91 billion in net income in 10 years time and a 25 times multiple on that would put the valuation
02:18 at just under $2.3 trillion. That works out to an investment return of 11% a year.
02:24 In other words, Meta only needs to achieve modest growth in order to be a reasonably good investment.
02:30 The market is telling us that Meta is improving and the company's next earnings report scheduled
02:35 for the 26th of July is going to be an extremely revealing event for long term investors.
02:40 For now, I give the stock a neutral rating but these are my personal opinions,
02:44 not financial advice and I've got no position in Meta stock. For more detailed
02:49 investing ideas make sure to visit our website overlookedalpha.com
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